*Oxford Bulletin of Economics and Statistics *(2010),
forthcomming. DOI: 10.1111/j.1468-0084.2010.00586.x **Abstract:** This article suggests an alternative formulation of the
cointegratedVector autoregressive (VAR) model such that the coefficients
for the deterministic terms have straightforward interpretations. These
coefficients can be interpreted as growth rates and cointegration mean
level coefficients and express long-run properties of the model. For
example, the growth rate coefficients tell us how much to expect
(unconditionally) the variables in the system to grow from one period to
the next, representing the underlying (steady state) growth in the
variables. The estimation of the proposed formulation is made
operationally in GRaM, which is a program for Ox Professional. GRaM can
be used for analysing structural breaks when the deterministic terms
include shift dummies and broken trends. By applying a formulation with
interpretable deterministic components, different types of structural
breaks can be identified. Shifts in both intercepts and growth rates, or
combinations of these, can be tested for. The ability to distinguish
between different types of structural breaks makes the procedure
superior compared with alternative procedures. Furthermore, the
procedure utilizes the information more efficiently than alternative
procedures. Finally, interpretable coefficients of different types of
structural breaks can be identified. |